Stifel Financial's wealth management unit reported strong results, but companywide profits plunged 75% year-over-year during the fourth quarter, capping off a year of aggressive acquisitions.
The firm's bottom line for the fourth quarter was hurt by weak revenue growth – just 0.6% year-over-year – and higher expenses, which 12.1%, Stifel reported on Wednesday
Stifel said equipment costs soared 40% to $62 million while expenses for communication and office supplies rose 20% to $35 million.
Christian Bolu, a research analyst at Credit Suisse, says that challenges remain for the firm.
"The quarter was even worse that we thought and the outlook is challenging; we heard little to suggest cost can be managed down in the near term to offset weak revenues. We continue to believe headwinds for [Stifel] are under-appreciated," Bolu wrote in a research note.
Meanwhile, the St. Louis-based firm's wealth management unit reported 9% growth in pretax profits, rising to $92 million. Market volatility during the fourth quarter might have dampened that growth somewhat. Commission-based revenue was up 11% year-over-year, but down 4.5% from the prior quarter.
That drop mirrors similar declines at other firms.
The remainder of the year may prove challenging as well because the regulatory environment is due to change with the Labor Department's forthcoming fiduciary rule.
CEO Ron Kruszewski told analysts during an earnings call that much of the industry's attention would be on what the final rule had to say about the so-called best interest contract exemption, which would permit advisors to do commission-based transactions under certain circumstances.
"I think everyone is waiting to see if you can even frankly operate in an environment with the best interest contract exemption. The BIC exemption is, in many ways, unworkable. That's my belief, but it's hard to speculate on something that I haven't seen yet," Kruszewski said.
He added that his firm was preparing for upcoming changes nonetheless.
"We're not waiting," the chief executive said.
PERCEPTIONS
Last year was a busy one for Stifel, which acquired Sterne-Agee, the independent broker-dealer, and Barclays' U.S. wealth management unit. The firm completed the latter acquisition in December. Stifel said the deal for the British bank's U.S. unit cost Stifel approximately $147 million in pretax expenses, according to the firm's presentation slides. That figure includes non-GAAP charges, including stock-based compensation, legacy broker notes, integration expenses and goodwill.
Although Stifel only brought over about 100 of Barclays' 180 advisors, Kruszewski said it will benefit his firm in material and nonmaterial ways. It's already had a notable effect on Stifel's recruiting efforts because it's improved the brand in the eyes of big producers at rival firms, Kruszewski said.
"It's always harder [to recruit] in down markets, but I can tell you that our position within the marketplace has been enhanced by the perceptions brought by the Barclays acquisition and by the investments we have been making," he said.
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